Pain for Ukraine: Economy loses 1.1 percent in Q1

Ukraine’s economy contracted 1.1 percent in the first three months of 2014, Ukraine’s Statistical Service reported Wednesday. This poor performance puts the economy on track to slow 4 percent overall in 2014.

The preliminary estimate compares to a 1.2 percent drop in the
same 3-month period in 2013, and a 2 percent GDP fall in the
fourth quarter, data also provided by Ukraine's Statistics Office. There was zero growth in 2013,
and the IMF has forecast a 4 percent contraction in 2014.

The past few months have been tumultuous times for Ukraine, which
has been the epicenter of violent protests that reveal the deep
political divide between the West and East. In February, a
provisional government took control of Kiev in the course of
events viewed as a coup in Russia. Presidential elections will be
held May 25.

But Ukraine’s economy had been headed towards default long before
Maidan protests began in November 2013 when then-President Viktor
Yanukovich refused to sign a trade agreement with the European
Union.

Gold and foreign exchange reserves are quickly depleting, and
currently stand at $12 billion. In February, before the
coup-appointed government took power, reserves had reached a
critical level of $18 billion. In 2013, more than $4 billion in
international reserves were wiped out.

Reserves are nearly gone because Ukraine’s Central Bank has spent
billions on currency intervention to prop up the sinking hryvnia,
which has depreciated 28 percent against the dollar this year.

The sliding hryvnia is also adding pressure on government
solvency, as over a half of Ukraine’s debt is denominated in
foreign currency.

Inflation is expected to continue to rise, with the IMF
predicting 12 percent in 2014.

The Ukrainian Central Bank is also tapping into the country’s
reserves to pay off the country’s fast-accumulating debt.

Finance Minister Vitaliy Lisovenko said the government has $9
billion in foreign-currency debt payments this year.

The country owes at least $2.2 billion to Russia’s Gazprom, but says this
obligation will not be a priority. State-owned Naftogaz is on the
brink of bankruptcy, because it has been selling gas domestically
for only a fraction of the import price.

A Eurobond sale could help stabilize the financial situation,
Deputy Finance Minister Vitaliy Lisovenko said Friday April 25.
The Eurobond sale would be under a US guarantee.

‘Help’ on the way

Ukraine is waiting for a final loan figure from the International
Monetary Fund, a package expected to be upwards of $18 billion. Details on the package are expected to
be announced today. The first tranche will come in May.

An additional $750 million from the World Bank, 600 million euro
from the European Union, and $100 million from Japan in aid will
make its way to Kiev. The US has also promised $1 billion in loan guarantees to help the
collapsing Ukraine economy. However, so far these are just
promises and no physical funds have been transferred to torn
apart Ukraine.

"Of course we need a fully fledged agreement with the IMF but
the European Union is ready for macro-financial aid in the
framework of the overall package. So we are ready to support
Ukraine," European Council President Herman Van Rompuy told
reporters Wednesday.

In December, Russia provided Ukraine with a $15 billion ‘no-strings-attached’ loan, but so far,
the West hasn’t delivered on any of its promises to help Ukraine.

Under the terms of the Russia-Ukraine deal signed in December,
Ukraine's debt shouldn’t exceed 60 percent of GDP. This means
that technically Russia has the right to demand the money back
before the bonds are due in 2015.